Contributed by Tariq Dennison, Wealth Manager, MWC Group
One major advance in Swiss interest rate markets over the past dozen years is the rise of the Swiss Average Rate Overnight (SARON) as THE key benchmark interest rate you should pay attention to, whether you are shopping for a mortgage or to earn the best rate possible on your savings. SARON came to replace the Swiss Franc version of the London Interbank Offered Rate (LIBOR) due to scandals over how LIBOR was calculated, as well as thanks to technical developments enabling the calculation of this new benchmark. This article will delve into what the SARON rate is, how it is calculated, and what an average saver or borrower should understand about it.
What is the SARON interest rate?
SARON is basically the most competitive interest rate at which banks lend each other money on a secured, overnight basis. It is measured by averaging the actual rates of executed repurchase agreement (repo) transactions between banks, in which one bank effectively lends Swiss Francs to another bank on an overnight basis, secured by Swiss Confederation Bonds as collateral so that the interest rate does not need to price in the risk of either bank failing. In theory, this makes SARON the most competitive interest rate any saver can earn on a deposit, versus the most competitive interest rate at which any borrower can borrow, with risk comparable to that of an overnight Swiss government bond. SARON rate is published daily by the Swiss Exchange (SIX) based on actual transactions, making it more robust and less prone to manipulation compared to LIBOR.
A major price setter in the Swiss repo market is the central bank, the Swiss National Bank (SNB), who has the unique ability of being able to lend as many, or borrow as many, Swiss Francs as it wants in order to be able to push the SARON rate as close as possible to its targeted policy rate. You can see an updated chart of the current SARON rate, versus the SNB policy rate, and compared with the 10-year Swiss government bond yield, here on the SNB website.
How can SARON help me earn the best rate on my savings?
The SARON rate gives you an idea of what a competitive bank deposit or cash account in a pension fund should be paying you on Swiss Franc cash deposits. Your bank will generally pay you significantly less than the SARON rate on regular checking or savings accounts and paying you that lower rate is a primary way that your bank makes money to cover the costs of all the other services they provide you, from branches and ATMs to online banking and electronic transfers. That is why more aggressive savers only keep enough money in bank accounts to cover current expenses and may invest excess cash in higher yielding investments like money market funds or short-term bonds. Similarly, although a good pension platform will pay rates close to SARON on excess cash in your pension, any portion of a pension fund that doesn’t need to be withdrawn soon may earn higher returns in longer-term assets.
Here it is worth noting again that the SARON interest rate only applies to Swiss Franc deposits, and that interest rates can be very different in different currencies.
How can SARON help me find the best rate on a mortgage?
New Swiss mortgages generally have an interest rate that is based on SARON, though many mortgages agree on a fixed rate for the first several years of the mortgage. Purely floating-rate SARON-based mortgages are the simplest type of mortgage, as the interest rate you pay each quarter is calculated based on the current SARON rate plus a fixed additional percentage, called the “spread”, often between 0.5-1.0% for prime borrowers. The rate on a mortgage fixed for the next 10 years is better compared to the rate on 10-year Swiss government bonds, which can also be seen charted via the SNB link above. As of this writing, the SARON rate in early October 2024 is around 1%, while the 10-year Confederation bond yields around 0.4%, so a mortgage with a 10-year fixed rate of 1.4% could be comparable to a SARON+1.0% mortgage, though the SARON mortgage would pay a higher rate of around 2% initially, and require rates to fall before it starts costing less than the fixed rate mortgage.
How can I hedge against future up and down moves in the SARON rate?
Like many other major interest rate benchmarks around the future, the SARON rate has futures contracts, traded on both Eurex and the ICE which can be used to lock in future SARON rates, and some see as a forecast of which way SARON rates might move in the future. The quoting convention of SARON futures is 100 minus the rate, meaning a June 2025 SARON futures price of 99.50 implies that the market expects the SARON rate to average around 0.50% (100 – 99.50) over the three-month period from June to September. Futures are an advanced trading instrument with which it is easy to lose large amounts of money rapidly if misused, so while these futures can be used to lock in a rate like this, futures should only be traded by those who understand the risks.
What to do next?
Like the Fed Funds or SOFR rate in US dollars, or the ECB policy rate and ESTR in Euros, the SNB policy rate and SARON tell you what today’s most competitive interest rate is on Swiss Franc cash. Checking on the SARON rate when shopping for where to put excess cash, or how much a mortgage is likely to cost you, is an important step in helping make sure you get the most competitive rate. Your MWC adviser, is here to help you keep up with these rates and ensure you are getting the best rates on both the asset and liability sides of your overall financial plan.
Manentia Wealth Consulting Group AG (Swiss company registered number: CHE-116.117.306) is registered with FINMA as Insurance Broker under number 29575 and member of PolyReg/PolyAsset as Portfolio Manager. Manentia Wealth Consulting AG is the parent company of Manentia Wealth Consulting Group Limited (Maltese company registered number: C80087) and licensed (MWCG-IF-15623) by the Malta Financial Services Authority (MFSA) to provide investment services as portfolio manager and to act as Enrolled Insurance Broker.
This post is intended for informational purposes only and does not constitute investment advice or an invitation by MWC Group to buy or sell any investment. While MWC Group has sourced this information from what it believes to be reliable sources, it makes no representations or warranties regarding its accuracy or completeness.
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